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Working Longer As The Retirement Solution Has Its Flaws

Today many people expect to work past the traditional retirement age of 65. According to the 2010 Retirement Confidence Survey conducted by the Employee Benefits Research Institute (EBRI), today 33% of workers expect to retire after age 65, a dramatic increase. In 1991, only 11 percent felt that way. One reason may be that many of us won’t be eligible for full Social Security payments until age 67.

Working Longer, Not Saving Enough

Even more important, few of us feel highly confident that we’ll have enough saved for when retirement time comes: only 16% according to the EBRI survey. On this, the skeptics seem to be right. According to a study published last December by actuarial firm Nyhart, “most employees age 60-64 will likely need to work until the age of 75 to be able to afford to retire at their current levels of contribution to their 401(k).”

Extending retirement further out into the future is also frequently proposed as a solution for the funding problems facing Social Security. In her recent analysis of the the current US economic situation, USA, Inc., former Morgan Stanley Internet analyst, and current Silicon Valley venture capitalist, Mary Meeker outlines the impact of moving Social Security eligibility from 67 to 73.

But what if a worker can’t work that long?

Why Are Some Retiring Early?

We seem to be working longer already. A second report entitled “Labor-Force Participation Rates of the Population Age 55 and Older: What Did the Recession Do to the Trends?” published last month by the EBRI notes that among people over 50 “since 1993, the overall labor-force participation rate steadily increased, reaching 40.2 percent in 2010—the highest level” since 1975.

But researchers digging deeper have found that not all groups are participating equally in that trend. While women of all ages 55 and up look like they’re working more, men 50 to 65 are not. Indeed, Bureau of Labor Statistics figures show that as a percent of eligible workers, fewer men age 50 to 65 are working today than were working in 2000. Even so, men are a larger piece of the employment pie than women by age 50 and up.

This reflects a long term trend, according to work by Alicia Munnell, director of the Center for Retirement Research at Boston College and co-author of the book Working Longer. Munnell notes that fewer 50-year-old men were working in 2009 than were in 1970.

What’s driving this is unclear. Are men choosing to retire early? Are they losing jobs and having a tough time finding new ones? Are they not healthy enough to work?

Planning for The Unexpected

Whatever the cause, this data is a reminder that it’s important for anyone saving for retirement to plan for a range of scenarios. Not only can we not be 100% sure when we will retire, we can’t be certain what our salary will be in our final years of work, or that the investments we’ve made will match their historical returns. At best, we’re taking educated guesses on all of those things, and we’d be wise to have a feeling for how we’ll address a shortfall in any one of those expectations.

If we do have to retire earlier than we expect, there will be higher health insurance bills to pay, no more earning credits toward a pension, no employer match to our 401(k), and there may even be emotional issues to deal with.

One thing we can do is save more and we probably should. According to their six-month review of nearly 10,000 retirement accounts from employees at 110 public and private companies, Nyhart concludes that:

* 81% of employees 18 or older will not be able to afford to retire by the age of 65
* Employees above the age of 55 will need to contribute more than 45% of pay through the remainder of their career to retire by age 65.
* Employees age 45-55 must contribute 19% of pay to retire by 65.
* The average participant, relying on their 401(k) as a primary retirement vehicle, will not be able to retire until the age of 73.

To better understand the viability of the “just-work-longer” argument it would help to better understand the reasons behind the differences between men and women over 50. Why are some leaving work earlier, while so many others are work later?

Certainly policymakers will have to deal with that on a national scale as they work on fixing the deficit and managing Social Security.

4 thoughts on “Working Longer As The Retirement Solution Has Its Flaws”

Working longer should be the last resort. I know that some live to work and may continue working because it’s what they love but we have to face the reality that we won’t have the mental or physical capacity in retirement that we enjoy today.

Preparing for retirement means looking for nuggets of gold wherever you can find them. One area is making the most of your retirement plans. Most of us will work more than one job so we are likely to have 401K and IRA. We recently did ananalysis of the difference between a plan with diversification into three areas as opposed to one with six. The plan with six areas gave you significantly higher returns over a decade (more than double) — same money in. Even if your 401K plan doesn’t give you that, you can use your IRA to counterbalance the 401K and achieve better returns.

There are other areas but working longer is an admission of failure of planning. Work if you want to, not because you have to.

Thanks to compounding, the balance in one’s IRA and other portfolios stands the largest chance of growing if left alone (and contributed to) the longest. I’ve tried a lot of retirement calculators, and while they all yield different results even with similar data, the one constant I’ve noted is that working even a year or two longer results in the largest increase in total portfolio value.

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